Correction or fall?

[princeplanet]

Been noticing more and more talk of an inevitable downturn in the market after the latest bull run. For the non noobs reading this, where do you stand on this? Time to get out? Reduce? Some stocks (maybe banks) more than others? I've set up stop losses, but I'm afraid a big sudden drop will crash right through them. I'm nervous because the GFC took 55% of my life savings (thanks to my ex FA), and I'm still down around half of that so I'm keen as hell to max this uptrend, just don't want to risk the good gains made in these past few months.....

 

[chops_a_must]

My opinion: too many "experts" are telling us the market is overvalued/ run too hard/ due for a correction, etc etc for it to fall just yet.

But then again, opinions are like ***holes.

 

[Iggy_Pop]

My view is we will get a few bumps but we are at the start of a longer term bull market. Time will tell

Cash will come in at any dips in the market

 

[CanOz]

I can't recall what the exact stats are but we're getting close to "sell in May and go away"... Seasonality has an edge.

The Market probably won't drop 5% in one day...its a process of rotation. I'm still fully vested in my Super...but got the finger on the trigger too...

From Jason Leavitt's site

You don't need to be a Technical analyst to read these charts...
CanOz

 

[tinhat]

To me, investing in shares is about managing risk. This is not something I have been great at doing but something I am hoping I am getting smarter at.

I'll use CBA for example, the largest shareholding in the SMSF. Great income stock. I think it's overpriced at the moment but I can see how it could go higher, if there is enough demand for the stock. The SMSF has to pay a pension, so it needs income. So, selling a good yielding stock like CBA is a hard decision to take. Yet, I decided to take my profits off the table last week and go a bit more into cash just for the moment. The price has run up quite hard. There might be a small correction soon or the price might keep going up. What exposure to risk do I hold at the moment and do I want to maintain or decrease my exposure to risk? I personally figure that there might be a good chance to re-enter the stock at a lower price sometime over the next six months before it goes ex-div again. No GST due to the SMSF makes the choice a little easier. I could be completely wrong though - but its more a question of managing risk.

 

[tech/a]

Some good points here.

I'm afraid I don't support the Bull Market theme.
In May the USA will again reach it's debt ceiling.

It's pretty clear that at some point it will have no choice but to stop printing money.
It is widely tipped that May is likely to be when that decision made.

If that occurs or even rumor of it occurring I'd would not be wise to be long.

I would also advise reading how over crowding in the market is likely to cause a collapse of the house of cards
To an extent never seen. When the saviour ( The Fed ) close the unlimited Banks doors---
There won't be any rescue for many!

So if risk mitigation is your mantra there is a grim reaper at the door of world economics---- in MAY.

 

[McLovin]

"Money printing".

The Fed is strictly forbidden from adding net financial assets to the private sector. Its role with regard to the private sector is limited to conducting asset swaps of exactly this nature, buying and selling financial assets and paying for them with electronic credits on its balance sheet ledger.

...

It’s the same thing again with the helicopter picture in the post I wrote quoting Ben Bernanke’s 2002 speech saying “The government has a printing press to produce U.S. dollars at essentially no cost“. It’s not literally true that the Fed is actually just throwing money from a helicopter. That’s what the fiscal agent does. Whenever the US government spends, it adds net financial assets to the private sector without a corresponding debit. When the US government taxes, it takes out net financial assets from the private sector without a corresponding addition. It is the fiscal agent that prints money and it is the fiscal agent that would create helicopter money if it ever came to that. I guarantee you, real helicopter money getting into the hands of people who would spend it on goods and services or to reduce debt would have a MUCH bigger impact than QE dollar for dollar. Real helicopter money is not coming. More likely is a giant Hoover to suck up private sector money rather than drop it out of helicopters.

http://www.creditwritedowns.com/201...anks-printing-money-to-solve-this-crisis.html

From my simpleton point of view the Fed is trying to maintain low interest rates and is doing so by doing what it does every day but on a vastly increased scale.

The debt ceiling is little more than a nominal amount that a bunch of lawyers (read: politicians) have created. It has no real bearing on the US economy unless they decide to play chicken when it comes time to raising it.

The biggest risk to the US economy is that debt/GDP cannot continue to increase.

 

[tech/a]

Whenever the US government spends, it adds net financial assets to the private sector without a corresponding debit.

This presumes the Govt has a surplus to pay cash for the asset---it doesnt its adding to debt.
Its just using its giant credit card. Bonds on issue!

When the US government taxes, it takes out net financial assets from the private sector without a corresponding addition.

And doesnt every tax payer know it regardless of where they reside.

The debt ceiling is little more than a nominal amount that a bunch of lawyers (read: politicians) have created. It has no real bearing on the US economy unless they decide to play chicken when it comes time to raising it.

It has increased from a few trillion to around 17 trillion in around 10 yrs so that has no real bearing????
Another say 10 trillion ---no problems?

The biggest risk to the US economy is that debt/GDP cannot continue to increase.

Its a massive risk to western economics not just the USA.
What an exciting time to be alive!!

 

[McLovin]

This presumes the Govt has a surplus to pay cash for the asset---it doesnt its adding to debt.
Its just using its giant credit card. Bonds on issue!

You've completely missed the point of what he's saying. And I mean completely and utterly.

 

[McLovin]

It has increased from a few trillion to around 17 trillion in around 10 yrs so that has no real bearing????
Another say 10 trillion ---no problems?

I guess it depends how you look at things. Over the last decade, America fought two wars that cost somewhere between $4-5 trillion. At the same time there were tax cuts (how absurd to have tax cuts while fighting two large wars!) that cost somewhere between $1-2 trillion. If you back those two items out you end up with debt that is somewhere between $5-$7 trillion lower than where it is today, and that's ignoring the worst recession in 80 years.

As long as they can stabilise their debt/GDP they'll be OK. On the + side, America will apparently be energy independent and even possibly a net exporter of oil within 10 years.

Of course this has now drifted well off the topic of the OP.

 

[craft]

The biggest risk to the US economy is that debt/GDP cannot continue to increase.

Total US debt (private+business+financial+public) to GDP is falling. Governement is not expanding it's balance sheet fast enough to stem that tide - the Hoover is winning. Yet the money printing urban legend rolls on regardless.

 

[tech/a]

You've completely missed the point of what he's saying. And I mean completely and utterly.

OK

It buys Bank Bonds to release capital to banks.
Which is fine as long as the bank doesnt do a Freddie Mac.
All of a sudden your asset isnt an asset but a liability and the bond is worth jack.
It has a liability in the money it gave in return for the Bond it recieved.
If it cant get re paid!!!

With a banking system which needs Govt intervention to stop it collapsing
the idea that the Fed can continue infinitum with this idea is ---urr flawed at best and suicidal at worst.

Black swans occur and it will only take one to un hinge the whole "system".
Came pretty close in 2008.

 

[Ves]

OK

It buys Bank Bonds to release capital to banks..

Nope - don't think this is right is it?

My understanding of the latest Q/E ("Operation Twist") is that they are buying-back longer-term government bonds and simultaneously selling some of the shorter-dated issues it already held in order to bring down long-term interest rates.

Are we talking about something different? This stuff confuses me at the best of times.

 

[princeplanet]

errr, so I take it you guys are a little pessimistic about the future But which future, near, far or somewhere in between? Another 1% + fall going on today. Is this the start of the big decline, or just another bump? I know, I know, no one has the crystal ball, but am just interested to read the musing of those on this forum with more experience and knowledge than myself about such things....

 

[tech/a]

Nope - don't think this is right is it?

Thats the way it reads to me!

So what happens is the Fed decides it wants to buy a bond. Using the Federal Reserve Bank of New York’s trading desk, the Fed makes a trade. It receives bonds that its bank counterparty owns and gives its bank counterparty money credit of equivalent value. The key here is that the money used to purchase these bonds was created as an electronic ledger entry solely for the purpose of acquiring the bonds. The Fed ‘printed money’ and conducted a swap of that money for existing financial assets. That’s what quantitative easing is.

Electronic or physical--still creating money from ---WHERE?

My understanding of the latest Q/E ("Operation Twist") is that they are buying-back longer-term government bonds and simultaneously selling some of the shorter-dated issues it already held in order to bring down long-term interest rates.

Are we talking about something different? This stuff confuses me at the best of times.

We are talking of gigantic economic policy. So broad that most of us have only a passing understanding of "some" aspects of the full situation.--Im one of them.
Even so Im more than happy to enter into discussion--be proven wrong or add some snippet that maybe of help to someone.

Is this the start of the big decline, or just another bump?

Right now a bump.
But from May on wards may end up being a dip which could end up being a cavern which could end up being a canyon.
The only way a canyon will appear is if all the cards alighn and a black swan even appears which causes a chan reaction which even the Governments of the world wont be able to throw enough money at it to stop it imploding.

It can happen ask the Japanese/Germans/Greeks etal.
When it happens to the worlds largest economy------

Mitigate risk---is my suggestion.

 

[McLovin]

OK

It buys Bank Bonds to release capital to banks.
Which is fine as long as the bank doesnt do a Freddie Mac.
All of a sudden your asset isnt an asset but a liability and the bond is worth jack.
It has a liability in the money it gave in return for the Bond it recieved.
If it cant get re paid!!!

I think you should probably have a look at the Fed's balance sheet. They're certainly not buying "bank bonds". They have agency guaranteed AAA rated MBSs on their books which are also guaranteed by the US government, and the record for prime mortgages during the GFC is impressive. The overwhelming majority of assets on the Fed's BS are Treasuries. This is pretty much how every central bank in the world manipulates interest rates, they're just doing it on a grand scale.

With a banking system which needs Govt intervention to stop it collapsing
the idea that the Fed can continue infinitum with this idea is ---urr flawed at best and suicidal at worst.

The point of QE is to lower interest rates to encourage borrowing/lending, not to save the US banking system. Why can't they continue to swap liabilities? It's not like they can't undo it.

 

[tech/a]

Ill get back on this Mc L Im tied up on tenders sorry---

 

[McLovin]

Ill get back on this Mc L Im tied up on tenders sorry---

No need to apologise.

 

[craft]

Sinner

What happened to your post? I read your linked article and then your post had disappeared. I agree with the push, pull on the rope analogy in that article and exactly for the same reason, I see no logical basis for concern in the size of the Fed balance sheet.

The underlying demand issue I give lots of credence too and my point is that, that is driving an actual decrease in total money creation – the reverse of what everybody seems to be fixating on.

Please fill me in on my big gap in understanding - because it must also be a 'blind' gap for me.

 

[Julia]

To me, investing in shares is about managing risk. This is not something I have been great at doing but something I am hoping I am getting smarter at.

Thanks for your example re CBA.
Could you discuss your attitude to risk a bit more? eg if the signs of GFCII became as obvious as they were the last time, would you still keep your current holdings? Take out the profit? Sell everything with the intention of buying back more cheaply?